PRESCIENT messages about INDIAN COMPANIES circulate in WhatsApp groups.
Three days before Dr. Reddy’s Laboratories Ltd announced quarterly results this summer, a message circulated on a private WhatsApp group saying the Indian drugmaker would not post good numbers.
Dr. Reddy’s was going to report a loss, according
to the message on the “Market Chatter” group, which was posted on July 24 from
a mobile phone number that Reuters traced back to Nishant Vass, an auto analyst
at ICICI Securities, a leading Indian brokerage. The WhatsApp group had 45
members, mostly traders.
The loss would have been a surprise to many
analysts, as consensus forecasts compiled by Thomson Reuters at the time showed
expectations of a profit of 3 billion rupees.
The message proved prescient: On July 27, Dr.
Reddy’s reported a loss of 587 million rupees (9.05 million dollars) - a result
its chief executive said was “below expectations”, sending shares down as much
as 4.4 percent.
The post that circulated in the WhatsApp group
three days earlier had predicted a loss of more than 500 million rupees.
A person who identified himself as Vass returned a
call from Reuters using the telephone number from which the Dr. Reddy’s numbers
had been posted on the WhatsApp group. He denied writing or sharing posts in
the group, adding later in a separate WhatsApp message from the same number
that it was “totally baseless” that he had done so.
Reuters has documented at least 12 cases of
prescient messages about major Indian companies, including Dr. Reddy‘s, being
posted in private WhatsApp groups.
Two of the messages appeared in the transcripts of
six groups reviewed by Reuters, including the “Market Chatter” group where the
Dr. Reddy’s numbers appeared. The others were shared on condition of anonymity
by two other members of other WhatsApp groups.
The posts with prescient numbers in the WhatsApp
groups were circulated hours or days before official company statements.
The messages shared could involve lucky guesses or
astute forecasts based on publicly available information, and not all metrics
shared among the 12 cases were exactly the same as reported.
Reuters could not determine where the numbers
posted on the WhatsApp groups originated or whether any of the market
participants who received the messages had traded on the basis of the numbers
they had seen.
According to two lawyers who were formerly senior
officials at the Securities and Exchange Board of India (SEBI), the country’s
capital markets regulator, if any numbers being posted on WhatsApp groups were
determined by regulators to be “unpublished price-sensitive information”, the
people circulating them would be breaking the law.“The mere sharing of information that could be
unpublished insider information is outlawed, even if you don’t misuse the
information to trade on it,” said Sandeep Parekh, a lawyer with Finsec Law
Advisors who used to head SEBI’s enforcement division.
SEBI did not respond to requests for comment.
India significantly toughened insider trading rules
in early 2015, expanding what constitutes “unpublished price-sensitive
information” to include “any information” that is not “generally available” and
that could have a market impact.
The law also expanded the scope of who constitutes
an “insider” to include “anyone in possession of or having access to
unpublished price-sensitive information” regardless of how they came “in
possession of or had access to such information”.
“You don’t need to have gotten inside information
from a company. You could get it from anywhere,” said Vaneesa Agrawal, a
partner with Suvan Law Advisors who formerly worked in SEBI’s legal department.
“As soon as you have information that could be insider information you are an
insider, and you are not supposed to either pass it on or trade on it.”
Circulating
“unpublished price-sensitive information” can result in penalties of up to 250
million rupees and a jail term of up to 10 years. The monetary amount can be
higher if it can be proven that an individual traded on such information.
ICICI
Securities said in a statement that it had “zero tolerance towards any
dissemination of unpublished price sensitive information and has an appropriate
framework to safeguard confidentiality of information.”
Dr.
Reddy’s said it was “not aware of any information related to its financial
results being circulated externally ahead of statutory disclosures that are
made officially by the company.”
MESSAGING THROUGH WHATSAPP:
The
messages about the 12 companies with prescient information obtained by Reuters
involved mostly what were characterized as being upcoming quarterly results,
including specific metrics such as net profits, revenues and operating margins.They
also included messages about upcoming bonus share issues or revenue guidance.
Seven
of the companies are part of the benchmark NSE index: Dr. Reddy‘s, the drug
maker Cipla Ltd, Axis Bank, HDFC Bank, Tata Steel, the IT services company
Wipro, and Bajaj Finance.The
other five were Mahindra Holidays and Resorts, Crompton Greaves Consumer
Electricals Ltd, the IT services providers Mindtree Ltd and Mastek Ltd, and
India Glycols, a petrochemicals company.
Wipro,
Bajaj Finance, HDFC Bank, Mastek, Crompton Greaves, Cipla and Mahindra Holidays
said they were not aware messages referring to their upcoming results or
announcements had circulated in WhatsApp, and that the companies adhered to
strict standards of guarding sensitive company information.Axis
Bank, Tata Steel, India Glycols, Mindtree did not reply to requests for
comment.WhatsApp,
which is owned by Facebook, responded to a request for comment by pointing to
its terms of service, which state users can use the platform only for “legal,
authorized, and acceptable purposes”.
HEARD ON THE STREET:
Many
of the postings in the WhatsApp groups are referred to as “HOS”, for “Heard on
the Street”.In
one typical post on July 25, Fanil Motiwalla, a contractor for a small
brokerage, Arcadia Share & Stock Brokers, posted a set of numbers for Axis
Bank, India’s third-largest private lender. Motiwalla works as a sub-broker,
who are typically hired as contractors by securities firms in India to recruit
customers.
“This
HOS is going around for Axis,” Motiwalla said when posting the numbers, which
included key metrics such as gross non-performing assets and net interest
margins. Later that day, Axis Bank reported results that closely matched the
final numbers in Motiwalla’s message. Arcadia said it had policies in place to
prevent employees from passing on “illegal information”.
Motiwalla
said he just reposted a message that had already been circulating in the market
and he did not consider it inside information. “How do I know if this is coming
from inside information? This could come from many sources,” he said. “This
information comes from different groups, and we just post it.”
Arcadia
said every sub-broker it hired was given a copy of SEBI’s rules, adding,
“whatever the alleged message sent by him is not sourced from Arcadia,”
referring to Motiwalla.
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